Monetary and Fiscal Policy

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Monetary and fiscal policy and their applications to the third world countries with a huge informal sector This essay seeks to explain what are monetary and fiscal policy and their roles and contribution to the economy. This includes the role of the government in regulating the economical performance of a country. It also explains the different features and tools of monetary and fiscal policy and their performance when applied to the third world countries with a huge informal sector. Monetary Policy Monetary policy is the mechanism of a country’s monetary authority (usually the central bank) taking up measures to regulate the supply of money and the rates of interest. It involves controlling money in the economy to promote economic growth and stability by creating relatively stable prices and low unemployment. A monetary policy mainly deals with the supply of money, availability of money, cost of money and the rate of interest to attain a set of objectives aiming towards growth and stability of the economy. Here are some of the monetary policy tools: Foreign currency requirement: This is a monetary policy which involves the government’s intervention to curb disorderly trends in the foreign currencies level. In case the quantity of a local currency goes down, the central bank uses the foreign currencies to buy its currency from the foreign economies. This ensures that the economy has ample home currency and thus enough money in circulation. Reserve requirements: It’s mandatory for all the banks to deposit a certain determined percentage of their assets with the central bank to make sure that the banks’ customer deposits are safe. These percentages are what the central bank adjusts to reduce or increase the banking lending ... ... middle of paper ... ...speech presented at the Fourth ECB Central Banking Conference, Frankfurt, Germany, 10 November 2006, viewed July 24, 2011 from, . Bhattacharya, RI & Ajay, SP 2011, Monetary Policy Transmission In An Emerging Market Setting, viewed July 24, 2011 from, . Federal Reserve Bank of Francisco 2011, U.S. Monetary policy: An Introduction, viewed July 24, 2011 from, . Rhagbedra, J 2007, Fiscal Policy in Developing Countries, viewed July 24, 2011 from, . Lipsky, J 2010, Fiscal Policies Challenges in Post-Crisis World, viewed July 24, 2011 from .

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